Can I Fund a Roth IRA & Contribute to My Employer’s Retirement Plan?
You can contribute to a Roth IRA and an employer-sponsored retirement plan, such as a 401(k), SEP, or SIMPLE IRA, subject to income limits. However, each type of retirement account has annual contribution limits.
For a Roth IRA or traditional IRA, the maximum annual contribution for 2021 and 2022 is $6,000 (plus a $1,000 catch-up contribution if you’re 50 or older). If you earned less than that, the limit is your total taxable compensation for the year.
You can contribute to a Roth at any age, even past retirement age, as long as you’re still earning taxable income. A working spouse can also contribute to a Roth IRA on behalf of a nonworking spouse.
The 401(k) annual contribution limit is $19,500 in 2021 and $20,500 in 2022, plus a $6,500 catch-up contribution if you were age 50 or older.
Key Takeaways
- You can contribute to both a Roth IRA and an employer-sponsored retirement plan, such as a 401(k), SEP, or SIMPLE IRA, subject to income limits.
- Contributing to both a Roth IRA and an employer-sponsored retirement plan can make it possible to save as much in tax-advantaged retirement accounts as the law allows.
- Before considering a Roth, contributing enough to your employer’s retirement plan to take advantage of any matching contribution can be a good idea.
- Understand the contribution amounts allowed in each plan for your age so that you can maximize your savings.
- There are also Roth 401(k) plans that use after-tax dollars.
401(k) and Roth IRA
Contributing to both a Roth IRA and an employer-sponsored retirement plan can make it possible to save as much in tax-advantaged retirement accounts as the law allows. The tax advantages of these accounts help your savings grow faster and larger than they would in a non-tax-advantaged account. The more you contribute to your retirement savings accounts each year, the earlier you’ll have the option to retire, as long as you invest wisely.
Also, since it’s impossible to know which tax bracket you’ll be in at various stages in your retirement—or what the tax rates will be at that time—it’s not a bad idea to have some retirement savings that you’ve already paid taxes on, such as the funds in a Roth IRA, and some that you haven’t, such as the funds in a 401(k). Then you can strategize your distributions to minimize your tax liability.
If you cannot contribute the maximum allowed to an employer’s retirement plan, aim to contribute enough to the maximum level that an employer will match contributions.
You can also contribute to a traditional IRA even if you participate in an employer-sponsored retirement plan, but in some cases, not all of your traditional IRA contributions will be tax-deductible. Your combined total contributions to both a Roth and traditional IRA can’t exceed the annual limits.
Income Limits on Roths
Before contributing to a Roth, it’s a good idea to contribute enough to your employer’s retirement plan to take full advantage of any matching contribution your employer offers.
Also, if your modified adjusted gross income (MAGI) reaches a certain threshold, the amount you can contribute to a Roth is reduced or eliminated.
The table below shows the contribution and income limits as well as the income phase-out range based on tax filing status.
Can You Contribute to a 401(k) and a Roth IRA In the Same Year?
Yes. You can contribute to both types of plan in the same year up to the stated maximums. You cannot, however, max out both your Roth and Traditional IRA accounts in the same year: those combined must together equal the IRA limit.
Do Roth IRA Contributions Count Toward Your 401(k) Limit?
No, Roth IRA contributions do not count toward 401(k) limits; but they do count towards your total IRA limits, so if you also have a Traditional IRA this will need to be taken into consideration.
Is There a Benefit to Having Both a 401(k) and Roth IRA?
401(k) plans have several advantages such as making tax-deferred contributions and the possibility of an employer match. Because you are using pre-tax dollars, you will have to pay income tax in the future on that money – but if you retire with a lower tax bracket there will be benefits since you take a higher deduction in the year you made the contribution. A Roth IRA is made with after-tax dollars and grows tax-free. These are best suited for assets that pay regular income such as dividends or interest that will never be taxed in a Roth. Thus, having both types of accounts lets you locate certain assets to where they will receive the greatest tax advantage.
The Bottom Line
You can contribute to both a Roth IRA and an employer’s retirement plan, and understanding the contribution amounts and limitations can help you plan accordingly in your allocation process. Contributing diligently and accurately, particularly in meeting the employer’s matching contribution levels, may allow you to retire early, but regardless, help ensure you have enough funds to see you through your retirement years.
